Japan's Two Economic Miracles and two Economic Disasters

The Answer Has Always Been There: How to Choose Prosperity Over Decline and War

Japan has produced two economic miracles and two economic catastrophes, and the mechanism behind each is the same. The West is quietly replicating the disasters while ignoring the cures. It is not too late to learn the lesson, but the window, as Japan's own history suggests, does not stay open indefinitely.

A Country That Keeps Getting Explained

Japan is the economic mystery that keeps getting explained and never quite solved. A country that industrialised from a standing start in the late nineteenth century, rebuilt itself from actual rubble after 1945, and then spent the better part of three decades shuffling around in a recessionary daze after 1990, it is the kind of story that should make economic theorists deeply uncomfortable, because the standard toolkit of explanations fits only so far before it starts to creak.

Ageing demographics, zombie banks, monetary policy missteps, the particular rigidities of Japanese corporate culture: these are all real, and they have all been written about at exhausting length by economists who have clearly never been short of a conference to attend. But there is an older, less fashionable explanation that runs deeper than any of them. It begins not in the boardrooms of 1980s Tokyo but in a tax reform enacted in 1873, resurfaces, in a rather different form, in the rice paddies of occupied Japan in 1946, and then vanishes again, in the way that obviously correct ideas tend to vanish when they become politically inconvenient.

To understand it properly requires a brief detour into a concept that was once central to how economists thought about wealth, and has since been more or less quietly shelved in the way one shelves an uncomfortable book: still technically available, nominally respected, but positioned where it is unlikely to be accidentally read.

A Word About Rent

Not your rent. Well, possibly your rent, but that is a different and more immediately distressing argument. The economic concept of rent, as David Ricardo meant it, is something more precise and considerably more interesting.

Ricardo, writing in the early nineteenth century, noticed something awkward about land. Unlike almost everything else in a market economy, land cannot be produced. You cannot respond to rising demand by making more of it. You cannot manufacture better soil, conjure a city centre out of the home counties, or construct an additional London. What you can do is own it, and if you happen to own a particularly good piece of it (fertile farmland near a busy market, a building plot in the centre of a growing city, or a rice paddy in the Kanto plain), you will find that people are willing to pay handsomely for the privilege of using it. Not because of anything you have done. Simply because of where it is, and because other people have made the surrounding area worth living in.

Ricardo called this surplus income “rent.” The farmer on good land near the market produces more than the farmer scratching at marginal soil in the uplands. The difference between their returns, after accounting for their labour and capital, flows not to either farmer as a reward for effort, but to whoever owns the better ground. It is income derived from position rather than from enterprise. Geography as a business model.

John Stuart Mill refined this into what he called the “unearned increment”: the automatic increase in land values that accrues to owners whenever the surrounding community invests in itself. A new railway station, a better school, a hospital: all of these raise the value of nearby land, and the landowner captures that value without having contributed a penny to the improvements that created it. The community builds; the landlord profits. Mill thought this was, to put it politely, a bit rum.

Henry George, the American economist whose 1879 book Progress and Poverty became one of the more unexpected bestsellers of the century, drew the logical conclusion. If the value of land is created by the community, he argued, it should be collected by the community. Tax land values, not the fruits of labour and enterprise. Remove the incentive to sit on land waiting for prices to rise. Let capital find somewhere productive to go instead. It was a radical proposition. It was also, as Japan’s history demonstrates with rather cruel clarity, an extraordinarily effective one. At least while it lasted.

The First Miracle: Meiji Japan and the Land Tax That Built a Nation

Chiso Kaisei: The Reform That Henry George Would Have Appreciated

In 1873, the Meiji government of Japan did something that would have made Henry George (had he known about it, and had he not been three years away from writing the book that would make his name) extremely pleased. The Land Tax Reform Act, or Chiso Kaisei, swept away the feudal patchwork of levies paid in rice to local lords and replaced it with a uniform national tax on the assessed value of land, payable in cash. The rate was set at three per cent of land value, subsequently reduced to 2.5 per cent in 1877 following rural protests that, in retrospect, were somewhat ironic given the alternative.

The administrative achievement alone was remarkable. Within six years, the Meiji government had surveyed roughly 85 million individual land parcels and issued ownership certificates for them. This was the early Meiji bureaucracy operating at full tilt, converting a complex feudal patchwork into a coherent cadastral system with the kind of energetic thoroughness that had previously been associated mainly with the construction of walls and the invasion of Korea. The tax initially provided somewhere between 80 and 90 per cent of all central government revenue. The historian Kozo Yamamura considered it quite possibly the single most important reform of the entire Meiji period, which is saying something for an era that also abolished the samurai class, built a navy from scratch, sent delegations around the world to learn everything worth knowing, and managed to industrialise in roughly the time it takes Britain to build a railway extension.

The crucial feature was what the tax was levied on. Not agricultural output, which would penalise productivity and encourage farmers to grow less. Not business profits, which would punish enterprise. Not wages, which would punish work. The value of the land itself. This meant that sitting on land and doing nothing with it was an expensive hobby rather than a lucrative strategy. If the state was continuously drawing off the rental value, the land speculator’s business model simply did not work. There was no point owning land you could not use, because the tax would eat your returns regardless.

Capital, consequently, had to go somewhere else. Somewhere else turned out to be factories, railways, shipyards and schools. Between 1870 and 1913, Japan’s GDP per capita grew at a rate that placed it among the fastest-developing economies on earth. By 1905, Japan had defeated Russia in a naval war that surprised everyone, including Russia. This was Japan’s first economic miracle, and the land tax was the mechanism that made it possible. Not by confiscating wealth, but by ensuring that wealth had to be earned rather than merely extracted from the position of those who happened to own the ground.

The Slow Unravelling

Effective policies have a habit of generating powerful opponents. This one was no different.

By 1889, a new constitution had quietly shifted political power back towards landowning interests, and what followed was the gradual, entirely predictable erosion of the tax: rates reduced, valuations allowed to stagnate as land prices rose, enforcement loosened, the gap between assessed and market value widening year by year in that comfortable way that fiscal arrangements tend to widen when the people responsible for closing them are also the people who benefit from keeping them open.

By the time Japan emerged from the wreckage of the Second World War, the land value tax existed largely on paper. The assessments bore approximately the same relationship to reality as a wartime government communiqué. As a restraint on speculation it had essentially ceased to function, which would matter enormously in the 1980s, but which in the immediate post-war period seemed academic compared with the more pressing business of rebuilding an economy that American bombing had reduced, in several cities, to approximately nothing.

What Happened When the Rent Came Back

The erosion of the Meiji land tax was not merely a fiscal inconvenience. It was the mechanism by which Japan’s first experiment in publicly captured rent was reversed, and it is worth dwelling on what that reversal actually produced, because the consequences were not merely economic. When the community-created wealth of land values stopped flowing into public revenue and began accumulating instead as private landlord income, the result was not merely that capital migrated from factories to fields. The result was, over the course of roughly half a century, a new feudalism, and then a catastrophe.

The reassertion of landlord power after 1889 reconstituted, in modern industrial form, the same extractive hierarchy that the Meiji reformers had attempted to dismantle. The great landlords who had lobbied the constitutional settlement back towards their interests were not the rough-hewn baronial magnates of the old Tokugawa order. They were a modernised landowning class, politically organised, economically entrenched, and intimately connected to the party system through money and patronage. What they shared with their feudal predecessors was the fundamental quality of their income: it derived not from what they produced but from what they sat on. They were, in Ricardo’s sense, pure rentiers, and the larger the share of national income they captured as unearned rent, the less was available for wages, investment, and the kind of broadly distributed prosperity that makes societies stable.

The consequences accumulated slowly, then very fast indeed.

The New Feudalism and Its Political Price: Rent, Ruin, and the Road to War

The Showa Depression and the Anatomy of Rural Despair

By the late 1920s, Japanese landlordism had reached a stage of extraction that would have felt familiar to any medieval peasant who had studied economics. Tenants were typically required to surrender half their rice crop in rent (in kind, not in cash), which meant they bore the full risk of price fluctuations while the landlord enjoyed a more or less fixed claim on the harvest. When the global depression arrived after 1929, agricultural prices collapsed: wholesale prices fell thirty per cent in two years, agricultural commodity prices by forty per cent, and silk (the other great rural income source) by close to fifty per cent. The Showa Depression hit rural Japan with the particular ferocity of a system already at breaking point. I hope this rings a bell for those of us in America and Europe.

The results were not merely economic statistics. Impoverished peasants, unable to pay their rents after the collapse in commodity prices, fell into spiralling debt to local moneylenders (often the same landlords to whom they owed rent) at usurious rates. Families were broken up. Children were sent to urban factories to earn wages the family needed to survive. In the worst-affected regions, daughters were sold into indentured service, sometimes into brothels, by fathers with no other means of discharging debt. The 1934 Tohoku famine (triggered by a cold summer that destroyed harvests across north-eastern Japan) was the apex of a rural crisis that had been building for years. Starvation in a country that was simultaneously running a modern industrial economy and a growing military empire: this was the human cost of privatised rent.

The rural poor had no political recourse. The party system had been, from its inception, entangled with landlord money and urban commercial interests. The Seiyukai and Minseito, Japan’s two main parties of the interwar period, alternated in government while remaining structurally incapable of implementing the kind of land reform that might have addressed the underlying problem. Conservative politicians worried, as one historian noted, about the increasing numbers of often-violent rural protests, but could not come up with a solution, not because solutions were unavailable, but because the people who would have had to implement them were the people whose interests the existing arrangement served.

Desperate Farmers and the Armies They Fed

The young men recruited into the Imperial Japanese Army in the early 1930s were, in disproportionate numbers, the sons of these desperate rural households. They came from the Tohoku region, from the silk-farming valleys of Nagano, from the rice paddies of Niigata, places where the depression had been most savage and where the contrast between rural immiseration and urban wealth was most visible. The junior officers who led the radical military factions of the 1930s were largely from the same backgrounds: men who had watched their families ruined by a combination of market forces, landlord extraction, and political indifference, and who had concluded that the parliamentary system was irredeemably corrupt.

This is the connection that links the erosion of the Meiji land tax to the political catastrophe of the 1930s, and it runs considerably deeper than simple correlation. The tenant farming system, once the land tax ceased to restrain it, recreated the conditions of pre-Meiji feudalism. The political system that had been constructed to protect that system proved unable to reform itself. And the men who had grown up in that system’s most exploited communities provided the social base for a military movement that promised, in its way, to destroy the corrupt order and replace it with something cleaner. The fact that what it replaced the corrupt order with was a militarist dictatorship, continental conquest, and the deaths of millions does not alter the economic origins of the rage that made it possible.

The connection between rural poverty and political radicalisation was understood at the time, even by those who were unwilling to address it. Scholars of the period have consistently found that the principal force driving the militarists’ takeover of the civilian government was provided by junior military officers who were largely from rural backgrounds. The May 15 Incident of 1932, in which young naval officers assassinated Prime Minister Inukai Tsuyoshi, and the February 26 Incident of 1936, in which a faction of army officers seized central Tokyo in an attempted coup, were not isolated lunacies. They were the political expression of an economic crisis that had its roots in the privatisation of community-created wealth, the conversion of land rent from public revenue into private income, and the social disintegration that followed.

The Ideology of Despair Finds Its Form

Rural rage needed an intellectual framework, and one was duly provided. The movement for a “Showa Restoration”, which sought to purify Japan of corrupt politicians, predatory capitalists, and Western influence by restoring direct imperial rule through military proxies, drew its popular energy precisely from the grievances of the rural poor. Its spokesmen condemned the zaibatsu corporate conglomerates for their exploitation of the countryside; they blamed the urban political parties for their collusion with landowning interests; they appealed to an agrarian mythology of the honest farmer, cheated of his rightful inheritance by a corrupt modern order.

The irony, which the movement’s adherents either did not perceive or preferred not to examine, was that the honest farmer had been cheated of his inheritance, not by the Western liberalism the ultranationalists despised, but by the landlord class whose political power the militarists were too tactically careful to challenge directly. The Meiji land tax had briefly made the honest farmer’s labour productive and his surplus his own. Its erosion had handed that surplus back to the landowners. The correct response, which a Georgist would have identified immediately, was to restore the tax. The response that Japan actually produced was to invade Manchuria.

The acquisition of foreign territory was explicitly promoted, among other things, as a solution to rural poverty, a way of giving land to the landless that required no domestic redistribution and no politically dangerous confrontation with the landlord class. One ideologue after another in the 1930s proposed colonisation of Manchuria and mainland China as the escape valve for rural overcrowding and rural debt. It was land reform by conquest: the community-created wealth that could not be redistributed at home would be seized abroad. The millions of deaths that resulted from this policy (in China, in Korea, across the Pacific theatre, and eventually in Japan itself) are the fullest possible account of what it costs when a society cannot find the political courage to tax its own land.

The postwar occupiers understood this. It is precisely why land reform was the first major domestic policy that Supreme Commander for the Allied Powers (SCAP), implemented, not as an abstract commitment to social justice but as a direct response to the demonstrated historical lesson that a society of landless tenants paying rent to absentee landlords is a society preparing, whether it knows it or not, to do something very destructive with its accumulated grievance.

Between the Miracles: The Ruins and What Was Done With Them

The Scale of the Problem

The Japan that emerged from August 1945 was a country of extraordinary devastation. Sixty-six major cities had been subjected to sustained firebombing. Tokyo alone had lost roughly half its structures. Hiroshima and Nagasaki require no further description. Industrial capacity had been destroyed, merchant shipping had been sunk, and the population was, in some cases, literally starving. Rice rations in urban areas in late 1945 fell to levels that nutritionists would classify as insufficient to sustain moderate activity.

Into this landscape arrived the Supreme Commander for the Allied Powers, General Douglas MacArthur, with a brief that combined the reconstruction of a shattered economy with the dismantling of the social structures that had, in SCAP’s analysis, made Japanese militarism possible. The two objectives were, in practice, deeply intertwined. The rural landlord system, which had survived both the Meiji reforms and the war essentially intact, was identified as a root cause both of rural poverty and of the political conditions that had allowed militarism to flourish. Landless farmers with nothing to lose and no stake in the existing order were, after all, excellent recruiting material for radical movements of various descriptions, and the Americans, having just finished one war, were not enthusiastic about providing the conditions for another.

Who Farmed and Who Profited

To understand the scale of what the occupation dismantled, it is worth grasping just how concentrated land ownership had become in rural Japan. Before the war, roughly 28.7 per cent of farmers were entirely landless tenants, while a further 38.4 per cent were semi-tenants who cultivated a mix of rented and owned land. The top three per cent of landholders owned 29 per cent of the land. Rents commonly consumed 50 to 60 per cent of annual crop yields, not because landlords were unusually rapacious by historical standards, but because the system had been structured, over centuries, to extract the maximum possible from those who actually did the work of growing food.

Tenants had virtually no security of tenure. A farmer could be evicted at will, and since his livelihood depended entirely on access to rented plots, often scattered across several different landlords, he had no leverage whatsoever. The landlord, meanwhile, was not required to do anything in particular except exist in relation to the land he owned. This is, to use the technical economic term, rent. Ricardo would have found it entirely familiar. George would have found it enraging. The average Japanese tenant farmer would simply have to suffer it, frightfully just like the tenants of American and British cities have to suffer their crippling rents today.

The Second Miracle: SCAP, Ladejinsky, and Land to the Tiller

Enter Wolf Ladejinsky

MacArthur is often credited with orchestrating the Japanese land reform personally, and there is a version of history in which he strides through the ruins of Tokyo, points at the landlord class, and declares them abolished through sheer force of patrician conviction. The reality is more interesting and considerably more intellectually textured.

The key intellectual architect of the redistribution was one Wolf Ladejinsky, an agricultural economist of Ukrainian-Jewish origin who had escaped the Soviet Union, studied at Columbia University, and arrived at the United States Department of Agriculture in the 1930s with views that placed him firmly in the tradition of Henry George. Ladejinsky was a Georgist in the substantive sense: he believed that the economic rent generated by land belonged to society rather than to private landowners, that land values were a social product rather than the creation of individual effort, and that the right to possess and profit from land derived, or should derive, from the act of working it rather than from inherited title or accumulated capital.

These views did not make him universally popular in Cold War America, where the distinction between “taxing unearned land rents” and “communism” was sometimes considered insufficiently clear by people who had not read their Ricardo. Ladejinsky was, in fact, investigated by the FBI and briefly suspended from his position in the mid-1950s on suspicion of communist sympathies, a suspicion that would have struck him as comical given that his Georgist convictions were rooted precisely in the belief that markets work well when they price land correctly, and fail badly when they do not.

In 1945, however, Ladejinsky was in Japan with MacArthur’s economic staff, and his analysis of the rural problem was crisp and historically grounded: the high rents extracted by absentee landlords were the structural cause of rural poverty and political instability, and the solution was not incremental adjustment but root-and-branch redistribution. Land to the tiller. The person who works the soil should own it.

MacArthur was not himself a Georgist (there is no evidence he had given Henry George more than passing thought), but he was a pragmatist who understood that political stability required economic legitimacy, and he viewed the reform as a “New Deal” for Japan: a rebalancing of economic power sufficiently dramatic to immunise the rural population against communist ideology and give it a genuine stake in the new democratic order. He was, on this point, absolutely right.

The Legislative Framework: How You Dismantle a Landlord Class in Three Years

The reform unfolded through two pieces of legislation passed in October 1946, preceded by MacArthur’s directive of December 9, 1945, which rejected the Japanese government’s rather timid initial proposals and ordered something considerably more thorough. The directive demanded that the government come up by March with a plan that would end what MacArthur described as “the virtual slavery that went back to ancient times”, the kind of language that, delivered from the Supreme Commander’s office in the Dai-Ichi building, tended to be taken seriously.

The resulting Agricultural Land Adjustment Law and Special Measure for the Establishment of Owner-Farmers were, in their combined effect, one of the most comprehensive agrarian redistributions of the twentieth century. All land owned by absentee landlords was made subject to compulsory purchase by the government. Resident landlords were permitted to retain up to 2.5 acres of tenant-cultivated land (in Hokkaido, where the scale of farming was different, this rose to ten acres), but everything beyond that threshold was expropriated. The government then resold the acquired land to the tenants who had previously worked it, on instalment terms spread over as many as 30 years, at an annual interest rate of 3.2 per cent.

In total, approximately five million acres, around 80 per cent of all farmland previously under tenant cultivation, changed hands between 1946 and 1950. Roughly 2.3 million landlords sold land to approximately 4.7 million tenant farmers. The share of self-owned farmland rose from 51 per cent to 89 per cent. The tenancy rate fell from nearly half of all cultivated land to just ten per cent. These are not incremental statistics. They describe a structural transformation of Japanese rural society accomplished, with remarkable speed and relatively little violence, in the space of four years.

Locally elected agricultural land committees were established in every municipality, empowered to grant or withhold permission for land transactions and to regulate the conversion of farmland to other uses. The 1952 Cropland Act subsequently locked these arrangements in place with additional restrictions on who could own farmland and how it could be transferred, a bureaucratic architecture that ensured the smallholder model remained intact long after the occupation ended.

The Inflation Trick: Confiscation by Other Means

The terms under which landlords were compensated are central to understanding the reform’s actual redistributive power, and they reveal either a masterstroke of policy design or a fortunate coincidence of economic conditions, depending on how charitable one wishes to be.

The government purchased land from landlords at fixed statutory prices set in 1945 values. Compensation was paid not in cash but in government bonds and trust deposits, specifically to restrict its conversion into more inflation-resistant assets. The tenants acquiring land paid in instalments over 30 years at fixed nominal prices.

Japan, at this point, was experiencing some of the most severe inflation in its history. Prices roughly doubled between 1945 and 1946, and continued to rise sharply through the late 1940s. The effect on the land reform’s economics was decisive. In real terms, the nominal compensation bonds paid to landlords were worth a fraction of their face value by the time they could be redeemed. The landlords received, in effect, approximately nothing for land they had owned for generations. The tenants, meanwhile, found that their 30-year instalment obligations, fixed in nominal yen, were being reduced to near-zero in real terms by the same inflationary process. They acquired land at prices that inflation rapidly made symbolic.

The mechanism was, in practice, a transfer of enormous wealth from one class to another, accomplished with the unobtrusive efficiency of macroeconomic conditions rather than the confrontational directness of straightforward expropriation. It worked precisely because nobody had to be seen to have done it.

Who Really Designed the Reform?

The intellectual credit for the land reform tends to oscillate, in the historical literature, between MacArthur and Ladejinsky. Both were important. But a more accurate account notes that the Japanese government itself was not a passive recipient of American instruction. Hiroo Wada, the Minister of Agriculture and Forestry and a senior figure in the Japan Socialist Party, was, by Ladejinsky’s own later admission, the real architect of the legislative details. The Socialist-led cabinet of Prime Minister Tetsu Katayama, which came to power after the 1947 general election, provided the political momentum to carry the reform through the Diet.

The reform was, in other words, a genuine political collaboration: American pressure providing the impetus and the authority, Japanese progressive politicians providing the legislative engineering, and Ladejinsky’s Georgist framework providing the intellectual rationale for why land redistribution was not merely a political concession to rural discontent but an economically coherent response to a system that had been extracting rent from those who worked the land and delivering it to those who merely owned it.

The Shoup Mission: The Tax System That Was Supposed to Complete the Job

While Ladejinsky was redesigning who owned the land, a parallel effort was underway to redesign how the Japanese state raised revenue from it, and from everything else.

Before the war, Japan’s tax system was, to put it charitably, idiosyncratic. Land taxes had once been the dominant source of government revenue, but by the interwar period had become marginal. By 1949, taxes on alcohol, tobacco, and admissions fees constituted 28 per cent of government proceeds, a fiscal architecture that, whatever its other merits, was not obviously designed to promote the equitable distribution of economic burdens. The income tax had “suddenly affected the great mass of citizens” after the war, in the words of the economists who subsequently reviewed it, rather than being applicable only to a wealthy minority. High marginal rates combined with inadequate and inconsistent enforcement meant that some people were heavily taxed while others, through connections or opacity, paid comparatively little. The system was simultaneously punishing and arbitrary.

In 1949, MacArthur invited Carl S. Shoup, a Columbia economist, to Japan to redesign the tax system from the ground up. Shoup arrived, travelled the country extensively, listened to an impressive volume of complaint about the arbitrariness and unfairness of existing arrangements, and produced a four-volume report whose proposals were enacted almost in their entirety by the Japanese Diet in 1950. The Shoup reforms introduced a system of direct taxation on personal and corporate income, with progressive rates and allowable deductions designed to make the burden both graduated and horizontal, taxing equivalent incomes at equivalent rates regardless of their source. They also proposed devolving more fiscal authority to local government, giving prefectures and municipalities clearer revenue streams and greater budgetary independence.

Shoup also proposed a value-added tax, one of the first in the world, predating Europe’s VAT experiments by over a decade. The VAT was duly enacted in 1950 and suspended almost immediately under business pressure, and was finally scrapped in 1954. This was, in retrospect, the beginning of the political erosion of the Shoup reforms more broadly: the income tax was made progressively less progressive through the 1950s, and the broader ambition of integrating the newly created class of smallholder farmers into a coherent, equitable fiscal system was pursued with decreasing enthusiasm as political conditions normalised and the occupation’s reforming zeal faded.

The land reform and the Shoup mission together represented a coherent programme: redistribute the land, then build a tax system in which the people who now owned small farms paid their fair share into the public revenue while the system simultaneously stopped penalising enterprise and labour. In practice, the tax reforms were more fully implemented than the land reforms but less durable, and the specific element that would have most directly addressed the structural problem, a proper tax on land values, was never adequately developed in either programme.

The Georgist Blueprint and the Political Stability Dividend

The explicit Georgist framework that Ladejinsky brought to the occupation’s agricultural policy had consequences beyond the immediate redistribution. Georgism holds, at its core, that the economic value of land is socially created; it reflects the investment of the surrounding community in infrastructure, services, and productive activity, and should therefore be captured by that community rather than accruing as private income to whoever happens to hold title.

Applied to rural Japan, this translated directly into the principle that the right to benefit from land derived from working it, not from owning it. The tenant farmer who had cultivated the same paddy for three generations and paid half his harvest to an absentee landlord in Osaka was, in this analysis, the victim of an institutionalised extraction of socially created value. The reform did not merely redistribute property; it applied, in the specific agricultural context of 1946 Japan, the principle that land’s value belongs to those who create it.

The political consequences were profound and, from the perspective of the reform’s American architects, gratifyingly conservative. By converting former tenants into property owners, the reform created a rural constituency with a direct stake in the existing order. Independent smallholders who owned their land had little interest in radical redistribution of the kind that communist parties were promising across Asia, and strong incentives to protect property rights and political stability. Research on the 1955 general election, the first full electoral test of the post-reform countryside, found that land reform had induced votes for right-of-centre parties, despite having been implemented largely by a Socialist government. The reform thus served as an effective counterweight to communist influence in rural areas precisely as Ladejinsky had theorised: not by oppressing the rural poor, but by making them prosperous enough to have something to lose.

The Second Miracle Unfolds

The economic consequences of the occupation’s land and tax reforms fed directly into what became Japan’s post-war economic miracle, and it is worth being specific about the mechanisms, because they illuminate both what the reforms achieved and where their limits lay.

By creating a class of rural owner-farmers with real disposable income for the first time, the reform generated domestic consumer demand for manufactured goods. Farmers who had previously handed over half their harvest in rent now retained it. They spent it. They bought bicycles, radios, sewing machines, and eventually the consumer electronics that Japanese manufacturers were becoming extraordinarily good at producing. This demand-side stimulus, sometimes described using the “Engel Effect,” referring to the increase in non-food spending as incomes rise, provided the internal market that Japan’s industrial recovery needed to complement its export drive.

The banking system, in the immediate post-war decades, channelled capital into industrial production because that was where the returns were. The Zaibatsu, the great pre-war industrial conglomerates, had been formally dissolved by the occupation, though their descendants, the Keiretsu, reconstituted themselves with sufficient speed to suggest that corporate structures have a certain viral quality. But the broad direction of investment in the 1950s and 1960s was towards manufacturing, infrastructure, and productivity-enhancing technology. Steel, shipbuilding, consumer electronics, automobiles: Japan’s industrial ascent was built on capital going where Ricardo would have wanted it to go, into enterprise rather than into the extraction of unearned rent from rising land prices.

Between 1950 and 1973, Japan’s GDP grew at an average annual rate of roughly ten per cent, compounding into the most remarkable sustained industrial expansion of the twentieth century. By 1968, Japan was the world’s second-largest economy. By the 1970s, it was producing cars and televisions that had begun, to the considerable alarm of Detroit and various European capitals, to outperform the domestic alternatives on quality and price simultaneously. This was not an accident of culture or national character. It was the result of capital being allocated, for once, towards the creation of real value.

How It All Went Wrong Again

The Land Tax That Wasn’t

The post-war economic miracle had one structural weakness, and it was the same one that had eventually destroyed the Meiji miracle: the land tax. The Meiji reform had used a tax on land values to ensure that capital moved into productive use rather than sitting in appreciating property. The occupation’s land reform had redistributed the land, but it had not restored a meaningful land value tax. The 1952 Cropland Act, while protecting smallholders from reconcentration of agricultural land, said nothing about the urban and commercial land that would become the speculative asset of choice as Japan’s economy urbanised and industrialised.

By the mid-1970s, with the land tax effectively defunct as a constraint on speculation, land had reverted to its natural condition in economies that do not tax it: it had become the most attractive asset available. Banks, which had been lending productively into industry during the growth decades, began to discover that lending against property was far safer and more reliable than backing manufacturers whose products might become obsolete. The incentive structure had shifted. Capital began to follow the incentives.

The Bubble and Its Mathematics

Between 1985 and 1990, Japanese land and real estate prices rose by more than 167 per cent. Broad money growth between 1987 and 1989 ran at over ten per cent per year against GDP growth of roughly four per cent. The gap between those two numbers is a reasonably accurate measure of how much of the economy’s energy was going into paper gains rather than actual production.

The statistics from the peak of the bubble have a quality of almost comic surrealism. In 1990, the land beneath the Imperial Palace grounds in central Tokyo, roughly a square kilometre of prime, if not especially developable, real estate, was valued at more than all the land in the state of California. Property in the Ginza district was selling at prices per square metre that made Manhattan look reasonably priced. Japanese golf club memberships were traded on secondary markets like securities, which at least had the merit of providing a new answer to the question of what a golf club membership is actually worth.

This was not wealth being created. This was Ricardo’s old surplus, economic rent, being capitalised into asset prices by a financial system that had run out of better ideas and was financing the whole thing with lending against ever-inflating collateral, which turned out to be approximately as stable as one might expect.

The real economy was being slowly starved. Entrepreneurs and small businesses found that banks preferred clients who could offer property as security. Credit flowed towards whoever owned land rather than towards whoever had the better idea. The economy was not in visible decline, but it was consuming itself, converting productive capital into speculative positions in the way that economies without a functioning land tax reliably tend to do.

The Fall, and the Decades That Followed

The Bank of Japan raised interest rates sharply in late 1989. The Nikkei, which had touched nearly 39,000 points on 29 December 1989, fell 35 per cent within a year. Land prices followed. Commercial property values in Tokyo’s central districts fell by nearly 40 per cent between 1992 and 1993 alone. By the time prices reached their floor, the commercial land price index for Japan’s six major cities had fallen 87 per cent from its peak. Residential land was down around 70 per cent by 2001.

The banking system, which had been lending against collateral that turned out to be worth a fraction of the assessed value, found itself sitting on a mountain of non-performing loans estimated at well over a trillion dollars. The 21 major banks that had existed at the start of 1989 had, by 2019, been reorganised into three. Credit contracted. Business investment withered. Nominal GDP, which had stood at $5.55 trillion in 1995, had fallen to $4.27 trillion by the mid-2020s. Real wages declined by around 11 per cent over the same period.

What came to be called the Lost Decade eventually had to be renamed the Lost Two Decades, and then the Lost Three. The branding became an exercise in ever-expanding understatement, rather like describing a fire that has consumed your house as “an ongoing situation in the structural timber.”

Fred Harrison and the Pattern That Keeps Repeating

Fred Harrison, the economist who drew extensively on Japan’s experience in his analysis of boom-bust property cycles, and who had predicted the 2008 financial crisis with disconcerting accuracy by tracking land price cycles, argued that Japan’s collapse is best understood not as a set of unfortunate coincidences but as a logical sequence with a single point of origin. Indicenty Harrison now predicts the next financial collapse for later this year, in 2026 or very soon after!

Remove the mechanism that makes land speculation unrewarding. Land immediately becomes the most attractive asset in the economy. Capital that should fund enterprise is diverted into property instead. Banks lend against rising collateral rather than backing uncertain ventures. The bubble inflates. It bursts. The banking system seizes. The economy stagnates. Decades are lost.

What makes this account genuinely uncomfortable is not that it requires anyone to behave irrationally. The bankers were doing what banks rationally do when the incentives point that way. The investors were rationally buying an appreciating asset. The property owners were rationally extracting economic rent. The disaster was systemic rather than the result of individual moral failure, which is precisely what makes it so difficult to address. There is nobody convenient to blame and no single decision to reverse. There is only an incentive structure that, left untended, reliably produces the same result.

Harrison drew the contrast between Japan’s economic models with some force. In the Meiji model, the land value tax made rent impossible to hoard and channelled capital into production. In the occupation’s agrarian reform, Ladejinsky’s Georgist principles redirected agricultural rent from absentee landlords to cultivating farmers, producing both an economic stimulus and a stable democratic polity. In the bubble model, with land tax gone, agricultural reform locked into smallholder stasis, and urban and commercial land entirely unencumbered by meaningful taxation, speculation was rewarded over enterprise, debt replaced equity, and whatever wealth the economy generated was quietly captured by whoever held the ground rather than reinvested in the rest of it.

The pattern, Harrison noted, is not uniquely Japanese. Britain’s council tax is based on property valuations last updated in 1991, bears no intelligible relationship to current land values, and taxes buildings as much as land. By early 2025, the outstanding value of residential mortgage loans in the UK stood at roughly £1,700 billion, approximately equal to the entire annual output of the British economy. The vast majority of what British banks do, in terms of balance sheet deployment, is lend against residential property. Business lending has been contracting as a share of total bank credit for decades. This is not a market failure in the technical sense. It is a rational response to a tax system that makes land a superb investment and enterprise a comparatively risky one.

The Argument That Has Been Sitting There for Two Hundred Years

Japan’s story is unusual in economic history because it is, in effect, a natural experiment run by the same country under multiple fiscal regimes over a century and a half, and the results of that experiment are not ambiguous. Publicly captured rent produced miracles. Privatised rent produced disasters. The relationship between those two outcomes is not coincidental.

The Meiji land tax made speculation unrewarding and enterprise necessary, and Japan industrialised at remarkable speed. When that tax was eroded and rent flowed back into private hands, the consequence was not merely slower growth but the progressive immiseration of the tenant farming class, the delegitimisation of the parliamentary system, the radicalisation of rural Japan, and eventually a military movement that channelled agricultural desperation into continental conquest, with consequences measured not in economic statistics but in millions of dead across Asia and the Pacific. The occupation’s land reform then demolished the rural tenancy system, redistributed land on Georgist principles, and provided the demand-side foundation for the post-war recovery. The dismantling of both the Meiji land tax and any meaningful successor left urban and commercial land free to become the economy’s primary speculative asset, and Japan spent three decades paying for it.

The pattern, stated plainly, is this: when the community-created wealth of economic rent is captured as public revenue, it funds enterprise, distributes prosperity, and produces political stability. When that same wealth is privatised, allowed to accumulate as unearned income to whoever happens to hold title, it funds speculation, concentrates inequality, and produces political instability. In Japan’s case, the political instability of the interwar period took the form of assassinations, failed coups, military dictatorship, and war. In the post-bubble period it has taken the rather milder form of three lost decades, declining real wages, a shrinking population, and a government that has tried essentially everything except the one thing that Ricardo identified in 1817.

Adam Smith, not generally known as a dangerous radical, observed that a tax on land values was particularly suitable as public revenue because it could not discourage production. You cannot produce less land by taxing its value; the supply is fixed. Unlike a tax on wages or profits, which creates an incentive to work or invest less, a land value tax simply redirects the unearned increment from private pockets to public ones, leaving the productive economy unaffected. Milton Friedman, despite his visceral hostility to most taxes, said the same thing. Joseph Stiglitz agreed. The theoretical consensus on this question is remarkably broad for a subject not celebrated for consensus.

Japan Today: Prostrate Again, and the Question Nobody Is Asking

The Third Privatisation of Rent

Japan in 2025 is not experiencing another 1980s bubble, at least not at the national level. The commercial land price index for the six major cities fell 87 per cent from its 1991 peak and never fully recovered. The banking system was reorganised. The zombie banks were eventually absorbed or wound down. The macroeconomic consequences of the bubble’s collapse have been, if not resolved, at least stabilised into a kind of permanent low-grade stagnation that the Japanese have absorbed with remarkable equanimity.

But the structural condition that produced both the bubble and the stagnation has not been addressed. Land in Japan’s major urban centres is once again appreciating sharply, Tokyo residential property rose over twelve per cent year-on-year by mid-2025, with central wards seeing even larger gains, driven by a weakened yen, record foreign investment flows, and the perpetual undersupply of housing in a city where land use regulations remain extraordinarily restrictive. In central Tokyo, rental vacancy rates run at four to five per cent, effectively full occupancy, and rents have been rising in step with purchase prices. The gross rental yields this produces, compressed to three or four per cent for prime assets, would strike any rational investor as inadequate compensation for the capital deployed, except that rational investors understand that the real return is not the income yield but the capital appreciation, which is untaxed and which, in a market where land supply is effectively fixed and demand from foreign capital is growing, can be relied upon to continue.

This is rent seeking. It is Ricardo’s surplus, accruing to those who hold title rather than to those who create value. It differs from the 1980s version mainly in that the financial leverage is somewhat more controlled and the speculative excess somewhat less baroque, no golf club memberships trading at multiples of GDP, at least not yet. But the underlying mechanism is identical: community-created wealth flowing into private hands because the fiscal architecture has not been designed to capture it.

The divergence between urban and rural Japan is itself a product of privatised rent operating in reverse. In the depopulating countryside, the akiya ghost villages where abandoned houses outnumber occupied ones and entire communities are reverting to scrubland, land has negative value. Nobody wants it. Nobody will pay rent for it. The community-created wealth of the Meiji industrialisation and the post-war recovery, which was once distributed across Japan’s rural population through the agricultural land reform, has retreated to the cities, where it concentrates in the hands of whoever was fortunate enough to have held urban land through the post-bubble recovery. Inequality in Japan, which was notably low by international standards through the 1960s and 1970s, a product precisely of the occupation’s redistributive reforms, has been rising consistently since the 1980s, and the wealth gap between urban property owners and the rural periphery is one of its most visible dimensions.

Untaxing Entrepreneurship: The Road Not Taken

The deeper cost of privatised rent is one that does not appear in property price indices or wealth distribution statistics, but that is felt in the aggregate stagnation of the productive economy. Japan’s entrepreneurs, and they exist, despite the country’s reputation for institutional conservatism, compete for capital in a financial system whose primary business remains lending against property. The start-up ecosystem in Tokyo has been growing, and Japan has produced genuine technological innovators across multiple sectors. But the fiscal architecture continues to tax labour and enterprise while leaving the unearned increment from land largely unmolested, which means that every entrepreneur is competing, at a structural disadvantage, against the risk-free return available to anyone who simply holds urban land and waits.

This is not a complaint about individual landlords, who are behaving entirely rationally. It is a complaint about a system that makes the rational choice, hold land, extract rent, wait for appreciation, more rewarding than the productive choice, which involves taking risks, employing people, paying wages, and creating things that did not previously exist. The Meiji land tax had resolved this problem by making the rational choice and the productive choice identical. If holding land idle costs you money in annual tax, you either put the land to productive use or sell it to someone who will. The post-bubble Japan of 2025 has not restored that mechanism. It has, instead, continued to allow the system that produced the bubble, privatised rent, bank lending against appreciating collateral, capital attracted to position rather than enterprise, to operate, at lower intensity and lower drama, while wondering why productivity growth remains anaemic and real wages continue their long decline.

The Question of History Repeating

It would be melodramatic to suggest that Japan is on the road to another militarist catastrophe. The post-war constitutional settlement is robust, the Self-Defence Forces are constitutionally constrained, and the social conditions of the 1930s, mass rural poverty, a politically organised tenant class, junior officers fresh from destitute farming villages, do not have precise modern equivalents. Japan is a wealthy, ageing, demographically shrinking democracy with good public services, low violent crime, and a population that has, by most measures, adapted to the post-bubble stagnation with the kind of stoic pragmatism that makes the country simultaneously exasperating and admirable to outside observers.

The more unsettling question is whether the political conditions of the 1930s are reasserting themselves in new dress. The disaffected young men of Michigan, Newcastle, Lyon and Düsseldorf, locked out of housing, underemployed, and increasingly drawn to movements promising national restoration, are not so different in their economic circumstances from the young men of Tohoku and Nagano who provided the social base for Japanese militarism. The grievance is genuine. The diagnosis, as ever, is wrong.

But the historical lesson of what privatised rent produces, in its economic form, in its social form, and in its political form, is sufficiently well documented in Japan’s own history to warrant something more than complacency. The interwar political catastrophe was not produced by bad people making evil choices. It was produced by a system of land tenure that concentrated economic grievance in the rural population, combined with a parliamentary structure that was institutionally incapable of addressing the underlying problem, combined with a military that provided an alternative political vehicle for the expression of that grievance. The specific form that Japan’s catastrophe took was historically contingent. The economic conditions that produced it were structural and, as Japan’s own history shows, repeatable.

What Japan has demonstrated, twice, is that it knows how to rejuvenate itself. It knows because it has done it. The Meiji land tax took a feudal agrarian society and channelled its surplus into an industrial revolution. The occupation’s agrarian reform took a shattered post-war economy and channelled the productive labour of millions of newly independent farmers into the consumer demand that powered the post-war miracle. Both times, the mechanism was the same: capture the community-created wealth of land as public revenue; untax the labour and enterprise of the people who actually create value; watch capital flow where it genuinely belongs.

The answer is not hidden. It is not arcane. It does not require new economic theory or novel institutional invention. It is sitting in the fiscal history of Meiji Japan, available for inspection by any government economist willing to read it. It is in Ricardo’s Principles of Political Economy, published in 1817. It is in Mill’s Principles of Political Economy, published in 1848. It is in George’s Progress and Poverty, published in 1879. It is in the land survey records of 1873, the occupation directives of 1945, and the agricultural land committee reports of 1950.

The question that Japan faces, the question that every economy facing the same structural problem faces, is not intellectual. Nobody seriously disputes the economics. The question is political: whether the people who benefit from not implementing the solution are, once again, better organised than the people who would benefit from implementing it.

History, on this point, has not been encouraging. But history also shows, twice, in the same country, within living memory, what happens when the answer is finally found. Two miracles, built on the same idea: that the wealth the community creates belongs to the community, and that when individuals are freed from the burden of paying rent to those who merely own the ground, they are capable of extraordinary things.

Japan has been extraordinary before. The fiscal architecture that made it so is not lost. It is merely, at present, out of fashion.

Which is, on the available evidence, a temporary condition.

The works of Fred Harrison, including Boom Bust: House Prices, Banking and the Depression of 2010 and Ricardo’s Law: House Prices and the Great Tax Clawback Scam, explore Japan’s property cycles and land economics in considerably more detail than space here permits. They are available through Shepheard-Walwyn https://shepheardwalwyn.com/fred-harrison-author/ and at sharetherents.org.